University of Calgary
NBER Working Papers and Publications
|February 2011||Investors' and Central Bank's Uncertainty Embedded in Index Options|
with Pietro Veronesi: w16764
Shocks to equity options' ATM implied volatility (ATMIV) are followed by persistently lower short-term rates. Shocks to the ratio of OTM puts' over OTM calls' implied volatilities (P/C) are followed by persistently higher rates. The stock's and Treasury-bond's ATMIV indices, which measure market and policy uncertainty, are counter-cyclical while the P/C index, which measures downside risk, is pro-cyclical. An equilibrium model where investors and the central bank learn about composite regimes on economic and policy variables explains these options' dynamics, linking them to a learning-based, forward-looking Taylor rule. The model produces several predictions on the relation between options, monetary policy variables, and beliefs that find support in the data.
Published: Investors' and Central Bank's Uncertainty Embedded in Index Options Alexander David University of Calgary Pietro Veronesi Rev. Financ. Stud. (2014) doi: 10.1093/rfs/hhu024
|December 2009||What Ties Return Volatilities to Price Valuations and Fundamentals?|
with Pietro Veronesi: w15563
Stock and Treasury bond comovement, volatilities, and their relations to their price valuations and fundamentals change stochastically over time, both in magnitude and direction. These stochastic changes are explained by a general equilibrium model in which agents learn about composite economic and inflation regimes. We estimate our model using both fundamentals and asset prices, and find that inflation news signal either positive or negative future real economic growth depending on the times, thereby affecting the direction of stock/bond comovement. The learning dynamics generate strong non-linearities between volatilities and price valuations. We find empirical support for numerous predictions of the model.
Published: Journal of Political Economy, Summer 2013, 121, 4, 682 - 746